Tim Colebatch is The Age's economic editor.

With disarming frankness, Joe Hockey has drawn a line in the sand: he says he wants to ensure that Australia's record 22 years of growth does not end on his watch. But with a record mining boom set to contract sharply, that could be hard.

It could also be easy. If China remains on its growth path, if the Republican moderates in Congress overpower the Tea Party zealots to keep the US growing, if Europe continues its gradual recovery, then 2014 and 2015 could see the world economy regain stability, confidence and pace. But as we all know, a world recovery is easier to envisage than to realise. There's a lot of moving parts, a lot of potential for things to go wrong. And as Ross Garnaut points out, some big forces will hold Australia back.

After all the unhelpful advice to Hockey - such as last week's self-indulgent speech by the chairman of his Business Advisory Council, Maurice Newman - Garnaut's new book, Dog Days: Australia After the Boom, is full of good sense, subtle insight and discriminating courage from one who knows from the inside what it's like for governments facing difficult decisions. I don't agree with all his arguments, and Hockey and his colleagues won't either. But I would urge them to read this book closely, and think hard about its proposals for meeting the challenges that are likely to dominate their term in government.

The Howard government fell because, in the end, it listened only to advice from Liberal loyalists, and ignored those concerned for the wider public interest. The Abbott government should learn from that mistake. It should welcome advice from eminent experts with the public interest at heart, as Garnaut has, even if their political associations have been with Labor.

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Garnaut's book is a formidable summary of where Australia is in economic terms, how it got there, what problems it faces ahead, and how to tackle them. For we of the public, denied the right to see Treasury's Blue Book briefing to the new government, this is our own briefing. It ranges from how to prolong growth, to issues of climate change, competition policy, a new blueprint for federal/state relations, and getting the budget back in the black.

If the government chooses to view each issue through a political prism, and makes decisions accordingly, then it will end up defeating itself.

Garnaut expects Australia's terms of trade - the ratio of export prices to import prices - to fall by 25 per cent before they settle. He estimates that in itself would cut government revenue by up to 4 per cent of GDP, and national income by about 5 per cent. Mining-related investment is likely to fall from 8 per cent of GDP towards its long-term average of 2 per cent. These are big changes, and they will come at a time when governments are trying to put budgets back in balance.

What to do? The first priority, Garnaut insists, is to try to bring the dollar down, a lot. It's not the only thing we have to do, but without that, all else is in vain. Newman's contrary view that the dollar is only a minor issue is silly, as his muddled comparison of Australian and US wages shows. In $A, our average manufacturing wage rose 11 per cent between 2009 and 2012. In $US, it rose 42 per cent. Three-quarters of that rise came from the rising dollar. We cannot restore our lost competitiveness without bringing it down.

Garnaut hopes that more interest rate cuts could do the trick. Experience suggests that's optimistic: in my view, the Reserve Bank needs to intervene in the markets to drive the dollar down, with the government helping by removing the $2 billion a year tax break to foreign owners of government bonds.

What about the budget? Garnaut's forecasts imply that, without action, the deficit could blow out horribly ahead - yet to cut spending and/or raise taxes would slow the economy further. He advocates doing both, trimming middle class welfare while closing tax breaks, but offsetting this (as Hockey plans to do) by a strong push to build productivity-enhancing infrastructure - chosen on economic merit, not for political reasons.

His next priority is competition policy. He argues that one reason why Australia's cost structure is so high is that we have allowed too much of our economy to be run by monopolies and oligopolies that are poorly regulated, shielded from competition, and able to get away with charging extortionate prices.

Tax reforms matter too, and he has a long list of them. They join industrial relations reform and ongoing competition reforms as his priority list for the long term.

I suspect his passion for reform of federal/state relations will also end up there, although it is within the Commission of Audit's brief. Garnaut wants to go the whole way: he argues we should start again, and assign full responsibility for each issue to one government or other.

For example, the federal government could leave education and transport to the states, but take full responsibility for health, including hospitals, and indigenous affairs.

Special purpose grants would be eliminated, so all Commonwealth grants would be untied: there would be no bureaucrats in Canberra overseeing state spending. Voters would know which government is responsible on any issue. Grants would be mostly handed out on a per capita basis, plus a flat payment to all states regardless of size.

I hope Hockey and Abbott read the book, and think about it. I would encourage you to do the same. These are big issues, and difficult times. Governments seen as self-serving will not deliver, and will not last.

Tim Colebatch is economics editor of The Age.

26 comments

The only plan either party has to grow the economy is high migration and selling off everything else to China. Australia is too fat, lazy, and complacent to do anything else.

Commenter

mj

Date and time

November 19, 2013, 8:09AM

He also wants wages for the lowest paid to fall over time. If the aim is to compete with Chinese wages then that's a hopeless cause, and we certainly don't want to win that race. Wage disparity in Australia has grown markedly over the last 15 years and if it continues we will end up with the sort of social problems we now see in the USA. We do not want to create a society of working poor, we can leave that job to the Business Council of Australia and their political arm the Liberal party.

Commenter

Matt

Date and time

November 19, 2013, 8:33AM

I see the all-purpose demon of “middle-class welfare” has raised its head again, yet as on every other occasion on which it has done so, no one bothers to put forward an argument or a detailed proposal regarding it. Does it mean the mandatory renewable energy target, under which pensioners pay more for electricity so that the middle class households can be subsidised to enjoy solar power? Does it mean the paid parental leave scheme under which ordinary consumers will pay more to business so that business can pay a tax to subsidise the lifestyle of people on $150,000 a year on the phoney argument that PPL is a workplace entitlement, which unlike every other workplace entitlement will be paid by the taxpayer not the employer? Does it mean the family tax benefit system, which provides some minimal recognition to the forgotten principle of horizontal tax equity?

If the last, can someone – anyone – design a welfare and tax system with the tax rates, the payment rates, the thresholds, the phase-out rates, the effective marginal tax rates, etc to avoid the twin problems of high EMTRs and high cut-off points for welfare payments. The scheme has to also deal with the fact that some low-income earners are on pensions and thus have these phased out as well if they earn money.

I have been issuing this challenge for years. No one has ever met it. It is so much easier to bang on about “middle class welfare”.

Commenter

Chris Curtis

Date and time

November 19, 2013, 8:49AM

I’ll illustrate my point with some figures.

Let us imagine that we pay $5,000 per child and our sample family has two children, giving that family a total FTB A of $10,000. We could phase that amount out from a modest $70,000 income at 20 cents in the dollar. It would take an extra $50,000 to disappear entirely and the effective marginal tax rate would be about 50 cents in the dollar. We would thus be paying “welfare” to someone on $120,000 a year and the cries of “middle class welfare” would echo throughout the land.

Alternatively, we could phase out the FTB A at 50 cents in the dollar. It would disappear entirely by the time the family’s income reached $90,000, but the EMTR would be a very high 80 cents in the dollar.

So, what’s the system to be?

Commenter

Chris Curtis

Date and time

November 19, 2013, 10:13AM

Or you could just phase out sitting down money to the voluntarily unemployed "domestic engineers" altogether.

Commenter

Sigh

Date and time

November 19, 2013, 12:14PM

You haven't mentioned the biggest "middle class welfare" rort (and the one that no government is prepared to face up to, because it's a baby boomer special) which is negative gearing, particularly for homes.

For those who bought and paid for their principle residence decades ago, before the property boom, the opportunity for a significant, taxpayer funded, co-contribution to an investment property or share portfolio, is irresistible.

Whilst pressure from a high dollar means Australian businesses battle to compete with imports, and our exports also come in for a battering, the property market is resurgent, and not with first home buyers but with investors. The Reserve Bank is unable to tackle the difficulties associated with the high dollar without risking a housing bubble and the government is unable to balance out the two speed economy because of the pact it made with the miners to get itself elected. As Australia heads down the path of increasing income disparity these problems are only going to get worse.

Commenter

CeeBee

Date and time

November 20, 2013, 12:24AM

I bet Abbott and Hockey will pay as much attention to the views of an economist like Ross Garnaut as most governments do when they make recommendations they don't want or like. Ignore them and hope that all will be forgotten.

Rudd and Labor stuffed up his recommendations for a tax on mining super profits through political incompetence and lack of a backbone to face up and argue for it. As then, I suspect the LNP through its "Commission of Audit" will as well, and allow big business to write its own recommendations and have the government act on its behalf.

So expect an increase in the GST, abolition of penalty rates and other workchoice like recommendations and neo-liberal agenda policies. What matters is only what this government wants to hear, or has promised to its backers. It will act on these recommendations to stay in government and push it own agenda.

If it did anything for the future prosperity of this nation or its populous like the Hawke-Keating industrial reforms, I would be in shock.

Commenter

Rover the dog

Date and time

November 19, 2013, 9:00AM

"In $A, our average manufacturing wage rose 11 per cent between 2009 and 2012. In $US, it rose 42 per cent. Three-quarters of that rise came from the rising dollar."

Had to read this a few times for it to make sense - was not seeing the "$" before 'US'.At any rate is this really so terrible - how much does Australia's GDP rely on the export of manufactured goods anyway?

Commenter

wizofaus

Date and time

November 19, 2013, 9:18AM

It's not just manufactures. It's also commodities, whether the stuff we dig up or the stuff we grow.

Commenter

Redsaunas

Date and time

November 19, 2013, 10:56AM

No explanation is provided why these changes are recommended. I would have thought that the economic drivers such as education and transport should be dealt with at a national level as these need to be consistent across State boundaries and internationally competitive. However, welfare measures should be dealt with at a local and State level to ensure personal needs of people are met at an appropriate government level.